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November 8, 2013 @ 1:25 am
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By John Helmer, Moscow

Interpipe, the leading Ukrainian pipemaker, failed to meet last Friday’s deadline for repayment to its international bankers of $106 million, sources in Kiev have confirmed. Interpipe, owned by Victor Pinchuk (image above) and his wife Elena, daughter of former Ukrainian President Leonid Kuchma, is the largest steelmaker in the former Soviet Union to face bankruptcy and liquidation in recent years. According to sources close to Interpipe, who ask not to be identified, Interpipe’s debts now exceed $1.3 billion; its free cash on hand is less than $50 million.

The group says it continues to produce pipes at its new electric arc furnace plant at Dniepropetrovsk, despite market shut-out measures adopted by Russia, the CIS Customs Union, and the US, which have introduced, or plan shortly to impose penalty duties on pipe imports of 19.4% and 30.8%, respectively. These measures, compounding the generally depressed market demand for pipes, have led Fitch Ratings to slash Interpipe’s earnings estimate for this year by more than $100 million to $260 million, possibly less[1].

Interpipe’s sales to Russia represent between 25% and 30% of its pipe export volumes. According to the company’s 2012 financial report — not released until August[2] — pipe sales to Russia amounted to $497 million, 28% of total sale revenues; sales to other CIS countries came to $278.4 million, or 16%; and sales to North America, $172.8 million, or 10%. While a steel market source says Interpipe has the potential to find other export destinations and to substitute low-priced steel billets for more valuable pipes in its export shipments, the import penalties by Moscow and Washington are “straws that broke Interpipe’s back.”

To find scarce cash Pinchuk is reported to be considering the sale of Interpipe’s growing inventory of unsold pipes to a trading company in his family group. Interpipe Europe LLC and KLw Wheelco LLC are based in Lugano, Switzerland; they handle exports of pipes and railway products, respectively. In London the group has also retained the international PR firm, Hill & Knowlton, to advertise that it is trying to boost billet sales[3] to rolling-mills specializing in railway steel products in Spain, German, and the Czech Republic.

Another temporary cash option was announced in Kiev last week when an unknown company called International Investment Technologies (IIT) announced it has agreed to purchase Interpipe’s trade payables. These are debts owed by Interpipe to its suppliers of raw materials. They are currently estimated by a source close to Interpipe to total more than $230 million; at December 31, 2012, Interpipe reported the payables to be $263.3 million.

According to this announcement[4] by IIT, the cash deal involves debts owed by three pipe subsidiaries of the Interpipe group, one scrap subsidiary, and Interpipe Steel. The purchase of the debts has been reported by a Ukrainian journalist close to Pinchuk to be at a substantial discount to the face value of the receivables. According to the reporter in Kiev, IIT is paying out, and Interpipe’s local creditors receiving, only 25% of the face value of the bills. Contacted directly, IIT confirms its published announcement of the transaction. But it declines to elaborate on the value of the transaction. It refuses to confirm whether IIT is controlled by Pinchuk or by others. Interpipe management is neither confirming nor denying the deal.

A steel industry source in Kiev says the IIT transaction may be the start of a Ukrainian attack on Pinchuk’s position at Interpipe, with the intention of presenting a demand for immediate repayment, followed by a filing in a Ukrainian court to put Interpipe into bankruptcy. Sources inside Interpipe confirm the group lacks the cash to meet a bill for $230 million in payables.

The alternative interpretation in Kiev is that Pinchuk is behind the IIT buy-up of the payables, with the intention of defending Interpipe from a raider – and making an arbitrage profit for himself into the bargain.

Sources close to Interpipe say a court-ordered bankruptcy and liquidation sale of the group’s steelmaking assets is unlikely for political, as well as commercial reasons. Ukrainian President Victor Yanukovich must decide whether to sign a partnership agreement with the European Union at the end of November in Vilnius, Lithuania. Pinchuk has been funding publicity in favour of closer ties between Ukraine and the European Union; as a consequence, he claims, he has been the victim of Kremlin reaction. Pinchuk is also paying a lobbyist and PR agent in the US, according to this US Government record[5]. But the lobbyist, Doug Schoen, has so far failed to prevent the Americans imposing a much heavier penalty duty on Interpipe’s goods than the Russians[6]. The next deadline for Schoen to report on his work for Pinchuk in the US is November 30.

The likely Ukrainian candidates for taking over Interpipe — Rinat Akhmetov, Igor Kolomoisky or Gennady Bogolyubov – have been targeted in the High Court in London with a lawsuit from Pinchuk for a stake he claims in the Krivorozhskiy Zhelezorudnyy Kombinat (KZhRK) iron-ore mining complex. The trio are not commenting on the litigation beyond the papers they have filed in court. For that story, read this[7].

A Kiev bank source says the consensus of Ukrainian bankers at the moment is that Pinchuk’s current liabilities exceed Interpipe’s worth. A steel market source says that with earnings (Ebitdar) estimated this year to range between $260 million and $290 million, Interpipe might sell at 3 to 5 times as much – between $780 million and $1.5 billion. The Kiev banker says such a valuation still puts Pinchuk’s steel business in negative net worth, for which there are no likely takers.

Sources close to Interpipe’s bank lenders say they are in no hurry to strike a new debt agreement with Pinchuk – the last one was reached in December 2011 – but they are not in favour of the liquidation of the assets in this sale range. The banks include Citi, Barclays, Unicredit, Intesa, Credit Agricole, and ING. Collectively, they are owed at least $835 million, according to Interpipe’s last financial report.

A recent approach by Pinchuk to one of the international banks to advise on the sale of assets was turned down because the bank believes the asset price is too low, and Pinchuk’s means to pay the transaction fees too small.

The principal banks met with Interpipe in London on October 22. A source close to the meeting says the banks refused to agree to Interpipe’s request for waiving the November 1 repayment, or for restructuring Interpipe’s total debts of more than $1.3 billion. In a default warning issued on October 28, Fitch Ratings said a debt deferment agreement was “unlikely to be reached in the current year. It would also appear unlikely that a waiver or standstill agreement can be agreed prior to the debt repayment date which would result in a payment default.”

Interpipe says it owes $193.1 million to the Italian export agency SACE. A bank source says that SACE was particularly “aggressive and difficult” during the debt restructuring negotiations of 2011. Questioned by Claudio Gatti, an investigative reporter for Il Sole 24 Ore, the business newspaper of Milan, SACE says its exposure to Interpipe is currently €115 million ($159 million.)

Danieli, the Italian steelmaking equipment supplier to the Dniepropetrovsk mill, was also obliged this year to renegotiate a final payment of €26 million because Interpipe said it could not meet the deadline, and also because Interpipe is claiming heavy losses on account of delay in commissioning the equipment at the contract specifications. Interpipe executives say the electric arc furnace Danieli installed for Interpipe has not been able to operate as the two sides agreed for technical reasons. Between Interpipe’s debt to Danieli and its recourse for the technical problems, the two have agreed on an instalment payment scheme over three years. But the full terms of agreement have yet to be finalized and signed. This may not happen until January. Aurelio Mortoni, a Danieli executive, refused to comment on the Interpipe disclosures. He claims Danieli has not incurred a financial loss from the project and has delivered full contract performance specifications.

Aurelio Mortoni, a Danieli executive, refused to comment on the Interpipe disclosures. He claims Danieli has not incurred a financial loss from the project.

Interpipe also acknowledges that it owes almost $200 million to Eurobond holders. The Eurobonds were issued in July 2007, with a 3-year term and 8.75% interest rate. These creditors have been agitating over the risk of Interpipe’s default since 2009; but a buyback of bonds by entities reportedly connected to Pinchuk has left the independent bondholders with insufficient votes to oblige Interpipe to redeem the bonds in full on the original maturity date. Instead, the repayment term has been extended to 2017, and the interest rate lifted to 10.25%.

Recently the independent bondholders have been threatening legal action against Deutsche Bank, the bond trustee. Deutsche Bank issued a notice to the bondholders on September 30 saying “the Trustee expresses no opinion as to the action Noteholders should take.” An accompanying note from Interpipe[8], endorsed for its truthfulness by Deutsche Bank, claimed there had been no default, and that by October 4 Interpipe intended to implement the process of listing the Eurobond on the Luxembourg Stock Exchange.

More than a month later, the bourse records show Interpipe has failed[9] to list its bonds. A source at the bourse in Luxembourg says the Deutsche Bank-Interpipe notices were not published to the bourse; there is also no record that Interpipe has made an application to list its notes, or negotiated the terms. The bourse is now investigating Interpipe’s claims, informing both Interpipe and Deutsche Bank that in order for the bonds to be listed, Interpipe must submit a new prospectus which the bourse will then review before approval.

The bourse categorically denies Interpipe’s claim to bondholders that it “is collaborating with the Lux SE and preparing the documentation requested by the Lux SE to maintain the listing of the Notes. The Issuer anticipates that this process will be finalised by 4 October 2013.”

At the start of last week Fitch had already downgraded Interpipe to a C rating, but the agency has yet to react to Friday’s default. Fitch may respond by issuing either a full default (D) notice, anticipating bankruptcy and liquidation proceedings administered by a Ukrainian court; or a restricted default (RD) notice. This would imply the likelihood of a debt deferment deal with the banks next year.

This wouldn’t be the first time. In December of 2009 Fitch issued[10] an RD notice for Interpipe, explaining “the downgrades reflect the uncured payment default on some of Interpipe’s bank debt facilities and the company’s confirmation of its cross-default on its major bank debt facilities and USD200m eurobonds. Fitch believes there is significant risk that Interpipe may experience payment default on its other debt facilities once the existing understandings with banks over payment deferrals lapse.” At that time, Fitch said Interpipe’s total debt was $900 million, “of which 47% was secured by company assets and future sales proceeds.” Today the debt is almost 50% greater, while the sales proceeds are dwindling.

In 2011 Interpipe’s creditors imposed tough terms on Pinchuk in their Override Agreement, requiring him to add $65 million in cash to Interpipe’s capital; reserve part of Interpipe’s trade cashflow for debt repayments; freeze $82.9 million in company cash; and block dividend payments to Pinchuk as the sole shareholder. Details can be found in the Interpipe financial report[11] for 2011, pages 39 to 41. For Pinchuk to find cash today to secure fresh debt arrangements is increasingly difficult.

In Moscow the Central Bank of Russia’s financial markets regulator has issued a notice suspending Pinchuk’s insurance company Rossiya from continuing in business. This follows an investigation of complaints from insurance policyholders that over the past year the company failed to meet about Rb4.5 billion ($141 million) in claims, primarily for third-party motor insurance. Current liabilities of Rossiya are estimated to run up to about Rb2.3 billion ($72 million).

Insurance industry sources in Moscow claim the premium income has been drained out of Rossiya, and has disappeared. According to the official note[12] dated October 23, the Central Bank inspectors have found insufficient liquid reserves in the insurance company to cover claims, as well as a shortage of the required capital.

A week after this notice, the chief executive of Rossiya, Andrei Dudnik, announced his resignation in a public letter. “The events of the last week have caused fatal damage to our company and made it impossible for its continued existence as an independent business unit. As I have said earlier , we have made every effort to keep the situation under control and stabilize it , but the losses in the business, of customers and of our staff are now so great that I do not see a way to manage this situation and further stabilize it.”

Rossiya had until November 4 to reply to the Central Bank and substantiate that it has the cash to continue in business. It has not done so, according[13] to Pavel Bashnin, the deputy CEO of Rossiya.

Another of Pinchuk’s cash reserves, Credit Dnepr Bank, which is based in the Ukraine, has been hit with a warning from Moody’s Investors Service. According to a Moody’s report[14] dated September 26, the loss-making bank will have difficulty covering a growing proportion of non-performing loans in its loan book unless Pinchuk raises new capital to add to the bank’s reserves. The Moody’s report concludes: “Credit Dnepr Bank posted a large net loss of UAH239.5 million [$29 million] for 2012, according to its audited IFRS report. This loss, which resulted to a RoA [return on assets] of minus-3.03%, was mainly driven by a nearly six-fold increase in loan loss provisions. The bank’s earnings were also pressured by growing funding costs and operating expenses. Weakening operating environment will likely continue to exert negative pressure on Credit Dnepr Bank’s profitability in the short-to-medium term.”

Moody’s hints that the bank may be exposed to lossmaking elsewhere in the Pinchuk group, and that Pinchuk himself is having trouble to meet the bank’s cash requirements. “We still believe that the bank will need to increase its loan loss reserves to cover all expected credit loss stemming from (1) difficult economic conditions, (2) high exposure to FX loans (about 50% of the loan book); and high borrower concentration…Credit Dnepr Bank reported a Tier 1 ratio (under Basel 1) of 8.1% at YE2012, down from 12% a year earlier and driven by the large losses. The bank’s total capital adequacy ratio (CAR) is supported by subordinated capital and was higher at 14.1% at YE2012. The bank’s shareholder plans to inject certain amount of funds into equity by September 2013. The exact amount is being negotiated. Nevertheless, we still expect the bank’s capital to come under pressure from weak internal capital generation in the medium-term, requiring further capital injections in the near-to-medium term.”

To date, there has been no announcement from Credit Dnepr Bank of the promised capital increase from Pinchuk. The last financial report from the bank was for the year ending December 31, 2012, and when asked today if Pinchuk had delivered the extra cash cover, the bank agreed to respond, and then refused.

There is also speculation in the international art market that Pinchuk’s record-priced acquisitions of art works by Damien Hirst may be up for sale, and that a private transaction is in the offing between Pinchuk and collectors in the Qatari ruling family. Much of Pinchuk’s purchasing of Hirst was arranged by White Cube, the London dealer, after it bested Gagosian, as well as French and Russian dealers in persuading Pinchuk on what to buy and at what price; the record of Pinchuk’s buying of Hirst works can be read here[15].

An international auction house source reports that Hirst has recently been buying back his own works to support the market price. He is also showing works loaned by Pinchuk at a retrospective exhibition now under way in Doha, under the sponsorship of the Qatar Museums Authority[16].